A fleeting glimpse of profit sharing on the other side

There have long been accusations that industry funds have been the beneficiaries of generous rebate arrangements from group insurers and both the Productivity Commission and APRA have provided a glimpse of the reality, Mike Taylor writes.

For as long as industry funds have been critical of financial planners being remunerated via commissions and dealer groups receiving volume rebates, financial planners have, in turn, suggested industry superannuation funds have been the beneficiary of similar deals via group insurance mandates.

And the proof of those similar deals seemed to be confirmed in an insurance company submission to the Productivity Commission's (PC's) Inquiry into Superannuation Industry Competitiveness and Efficiency.

That submission, from major group insurer TAL, referred to "profit share rebates' in the context of group insurance mandates.

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The TAL submission described the rebates as "as mechanism to return an agreed percentage of profits on insurance policies (due to better than expected claims experience) back to members".

"They are paid as either lump sums or as an offset against future premium," it said. "TAL pays these rebates on the expectation (and often on a contractual assurance in the policy) that the funds are used for the benefit of members."

"We believe that profit share rebates are a fair way to deal with contingency allowances in pricing due to uncertainty of claims experiences," the TAL submission said.

The insurance company, which holds mandates for a number of the large industry funds including AustralianSuper, said it was particularly difficult to accurately predict when an adverse claims experience would arise and, once it had arisen, stabilise.

"These rebate mechanisms operate to temper the fluctuations that occur in profitability due to claims experience and operate as a cap to profits that life insurers can enjoy and facilitates the provision of more cost effective insurance for members," it said.

"In our experience we have found that profit share rebates create alignment between funds and insurer. There is no evidence that rebates drive incentive for trustees to act inappropriately."

Hardly surprisingly, the TAL submission prompted a flurry of comments on moneymanagement.com.au from financial planners arguing that it validated their claims that the industry funds which had been so critical of financial planners' remuneration arrangements had not come to the debate with clean hands.

Importantly, the reference to the "profit share rebates" contained in the TAL submission then had its corollary in Senate Estimates when Tasmanian Liberal Senator, David Bushby, a close watcher of the activities of industry superannuation funds raised the issue with the Australian Prudential Regulation Authority (APRA) which then substantially confirmed the practice.

However the regulator sought to reassure Bushby that it believed that there were no untoward implications flowing from such arrangements between insurers and super funds.

In question posed to APRA deputy chair, Helen Rowell, Bushby asked bluntly whether "superannuation funds [were] receiving multi-million dollar rebates from life insurers".

Rowell responded by confirming that "some group insurance arrangements do have what we would call a ‘premium adjustment mechanism'".

She said that this meant that "if experience is good, then there is a payment back to the fund, but if experience is poor, then the premiums would be increased".

"The intent of those arrangements is to smooth the premiums over time for members and funds reflecting the actual experience that is incurred," Rowell said. "When insurers price their insurance arrangements, they inevitably include a margin for uncertainty around claims experience. The premium adjustment model allows them to smooth that out over time, and ultimately, we think, that achieves good outcomes as long as it is well-managed and well covered."

Hardly surprisingly, Bushby then queried whether such arrangements might have the effect of distorting the position of superannuation funds with respect to protecting their members' interests at claims time.

"Are you concerned at all about any aspects of it, in terms of the potential for distortions in behaviour that may have some perverse outcomes?" he asked.

Rowell responded that the things APRA tried to satisfy itself about were the nature of such arrangements — "their terms and conditions, what the parameters are around the level of adjustment and how that will be determined, and to ensure that there is, in essence, still good underwriting, good claims management processes, and that there are no material conflicts or governance issues that we would be concerned about".

"We do not necessarily just accept these things at face value. We do actually go through a rigorous process of talking to the insurers and the trustees about the nature of the arrangements, and how it will work in practice to be satisfied that it is in the best interests of members," she said.

Bushby said the type of thing he was concerned about was that the arrangements "might build in an incentive not to pay out so that they can then give rebates on premiums, or that type of thing".

Rowell said that was why APRA believed claims control and claims assessment management processes were "quite key, making sure that you have got sufficient checks and balances in that process to make sure that valid claims are being paid when they should be, in accordance with the contract".

Bushby urged Rowell and APRA to keep an eye on the situation, but in the absence of further discussion of the issue in the PC, it seems unlikely profit share rebates will be discussed any time before APRA next appears before Senate Estimates.